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Meal And Entertainment Expenses When Conducting Business

by on May 26, 2011
Reimbursements are nontaxable to employees—excluded from gross income and exempt from FITW, FICA and FUTA—under the following conditions:

· A specific business benefit is expected to result from the discussions immediately before, during, or immediately after the meal or event, such as a meal with a business person to discuss the employer’s products/services.

· The meal or entertainment is in active pursuit of business. You don’t have to prove that a sale or other business benefit resulted from the meal or entertainment, or even that more time was devoted to business than to entertainment. But you must be able to prove that business was the primary purpose of the event, not incidental to it.

· The setting is conducive to business. The IRS often (but not always) deems as pure entertainment and not business events, business meals and entertainment events conducted at night clubs, country clubs, golf courses or resorts. Safety net: Hold a business meeting immediately before or after these outings and make sure you can prove that a business meeting was the primary purpose of the event and that the location was conducive to the business purpose.

· The cost of the meal or entertainment is “reasonable.” The IRS deems “lavish and extravagant” a meal or entertainment event to be nondeductible. Because the line between “reasonable” and “lavish and extravagant” is unclear, be prepared to justify the expense in relation to the business benefit actually derived or at least anticipated. For example, a $500 meal to discuss a $100 sale with one client may not pass the test.

The following example illustrates how important it is to properly classify meals as being for travel v. business/entertainment.

Example: Jim, a sales employee for a Newark, NJ firm, travels to New York City for a sales seminar. He leaves his home in Newark at 6 a.m. and does not get home until 6 p.m.

Situation 1. Jim’s lunch during the one-day trip. Jim pays $15 for lunch, and his employer reimburses him. Is the reimbursement taxable? Yes, because no overnight stay was required for the travel between Newark and New York City, and Jim did not conduct business with a prospect or colleague at lunch. The $15 reimbursement is wages subject to FITW, FICA and FUTA.

Situation 2: Jim’s lunch with a co-worker during the one-day trip. Jim pays $15 for lunch with a sales trainee from his firm who is attending the seminar with him. They discuss their sales campaign, and Jim’s employer reimburses him. Is the reimbursement taxable? No. Because business was discussed, the meal qualifies as a business/entertainment expense, and the $15 reimbursement is excluded from Jim’s gross income and is exempt from FITW, FICA and FUTA.

Problem: Jim’s expense report must indicate a “business meal.” If, instead, he reports the $15 as a “travel expense,” the reimbursement is subject to FITW, FICA and FUTA because an overnight stay was not necessary in traveling to the training location.

Solution: Expense reports with two separate sections for meal expenses while traveling v. meals for business/entertainment avoid this problem.
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